WP Carey Inc (WPC) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the W. P. Carey & Co. fourth quarter and year end 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Sammy Hood, Second Vice President of Investor Relations. Thank you, Mr. Hood, you may begin.

Good morning, and welcome everyone to our fourth quarter and year end 2006 earnings conference call. Joining us today are W. P. Carey's Chairman, Bill Carey; CEO Gordon DuGan; Acting Chief Financial Officer, Mark DeCesaris; and Chief Operating Officer, Tom Zacharias.

This call is being simulcast on our website, wpcarey.com and will be archived for 90 days. Before I turn the call over to our CEO, Gordon DuGan, I need to inform you that statements made in this earnings that are not historic facts may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey's expectations are listed in our SEC filings.

Now I'd like to turn the call over to Gordon.

Thank you, Sammy. Good morning, everyone, and thank you for joining us on our earnings call this morning. As you saw in our press release, we had a strong year and a strong fourth quarter. The merger helped in that and helped tremendously, and Mark will go through the numbers, but I'd also like to have everybody keep in mind that for the quarter and the year, we did defer substantial revenue that we expect to earn in the second quarter of this year. So while the merger was a onetime event or a not very often event, so is the deferred revenue.

For the fourth quarter, we closed 12 transactions totaling about $270 million of investment volume versus $85 million of investment volume in the fourth quarter of the prior year. What we found in looking at our deal volume is that we are doing a fairly large number of deals; 12 transactions in a quarter is quite a number. It took a lot of work to get 12 closed. The deal size is a little bit smaller than we would like, especially in the United States, but that's where we're finding the best risk return trade-offs and our investment pipeline is on a lot of these smaller deals. So we're working hard in finding these smaller deals and we're finding very attractive investments, but they're a little bit smaller than we would like.

On the international side, we tend to do fewer deals, but we have a better average size. We closed -- three of the 12 investments that were closed in the fourth quarter were international investments. For the year, volume-wise, about half of our volume was international. Again, international -- and that's primarily Europe, excluding the United Kingdom. Our international volume is characterized by higher average deal size and fewer deals. And so it's a little bit different as we look at North America versus Europe.

The investment environment for us we think has stabilized. We're very active in North America and Europe and our backlog today is pretty good. We're happy with the deal flow we're seeing. It is still competitive, but it seems to have stabilized.

We also mentioned in the fourth quarter, we initiated our self storage initiative and there we closed on six properties for roughly $25 million of investment volume in self storage.

As we sit here today and reflect on last year and where we are today, I think there are a number of positive events that have occurred and a number of positive things as we look forward. We had the merger of CPA-12 and CPA-14. Not only did we earn our back end revenue from CPA-12 that Mark, again, will go through in detail, and the CPA-12 performed very well, but we also purchased roughly $125 million of properties from CPA-12. When you combine that with the shares that we take in our affiliates of roughly $30 million, the $30 million in shares translates to, again, roughly $60 million of assets because the shares of the equity only. The funds tend to be leveraged about one- to-one.

The $125 million plus the $60 million gave us over $180 million of new real estate investments made by W. P. Carey last year. Another positive event, CPA-16 Global Part II, we raised $550 million in record time. I think we continue to see record demand by investors for real estate income- based investments; more demand than we are able to fulfill, frankly, and so we are not currently raising money right now. But the demand from investors for that type of product remains very, very strong today.

In addition, we filed yesterday CPA-17 Global, which will be up to a $2 billion offering that we hope to kick off this year, and that was filed, I believe again, yesterday with the SEC. In addition, our assets are performing very well. Tom will through in detail a little bit more about this performance, but we've sold a number of properties for substantial gains. In addition, the portfolios are doing very well from an occupancy standpoint, so we're very happy with where that is.

I mentioned the self storage initiative has kicked off. And one point I would like to make on CPA-17, we are attempting to structure 17 in future funds in a more tax efficient manner so that some of the back end revenue that we receive and some of the other revenue that we receive that's performance-based can be structured in a more tax efficient manner, which has been one of the issues that we've been grappling with. If you look at CPA-17, you will see that we are attempting to do that.

As we begin 2007, as I mentioned, again, in the press release, we begin the year with a very strong balance sheet, one of the strongest balance sheets in the industry; very good cash flow, and we are quite optimistic about 2007.

With that, I'll turn it over to Mark, who will walk us through in detail some of the financial results.

Thanks, Gordon. And as I discuss our results today, I would like to discuss how we look at the business, which is in two segments, both the management services segment and the real estate segment. Then we will come back at the very end and we'll discuss some of the detail and how the merger impacted our results in 2006.

I'd like to begin with the management services segment which had a very strong year. Growth in its core business as well as a significant impact of the CPA-12 and 14 merger affected those results. Let me walk you through the results for the year and we'll come back again and talk about the merger.

In our management services segment, assets under management increased to $7 billion. Our asset management revenues for the fourth quarter of 2006 increased to $14.1 million, a 5% increase over the prior year's period of $13.4 million. For the year 2006, asset management revenues increased to $57.6 million, a 10% increase over prior years' revenues of $52.3 million. Net increases in assets under management as well as increases in the annual asset valuation of the CPA refunds accounted for this increase. In addition, in 2006, the Company generated an additional $46 million in revenue in conjunction with the merger of CPA-12 and 14.

Investment volume was $269 million for the quarter and $720 million for the year as compared with $87 million and $865 million for the respective periods in the prior year. These investments generated structuring revenues of approximately $6.7 million for the fourth quarter and $22.5 million for the year 2006, as compared with $2.8 million and $28.2 million respectively in the prior year. The decrease in structuring revenues was caused by a combination of lower investment volume of $145 million and a higher percentage of investments placed in CPA-16. We placed 76% of all investments in CPA-16 in 2006 as compared with 68% in 2005.

We have discussed in prior calls the fact that a portion of both the percent and the performance and acquisition revenues are subordinated to achieving a cumulative cash distribution return of 6% in CPA-16. As of the end of the current quarter, CPA-16 is currently paying an annualized cash distribution rate of 6.44% with a cumulative average return of 5.87%.

The Company has deferred recognition of performance and structuring revenues of approximately $6.4 million for the current quarter and $16.3 million year-to- date. Cumulatively, we have deferred recognition of $40.5 million of performance and structuring-based revenues and interest. The Company currently expects to meet the hurdle in the second quarter of 2007. Partially offsetting this, we have deferred incentive and commission compensation totaling $5.9 million that are also related to attaining this hurdle.

Income from the management services segment was $33.5 million for the quarter and $53.8 million for the full year 2006. This compares with net income of $5 million and $24.7 million for the respective periods in the prior year. The increase of $28.5 million for the quarter and $29.1 million for the year were due primarily to the merger, but also reflected lower G&A costs of approximately $3.7 million.

I would like to move to the real estate segment now, which also had a very strong year, and was also impacted by the mergers; the Company increased its portfolio with assets purchased from CPA-12 prior to its merger with CPA-14. In our real estate segment, revenues increased 12% to $21.3 million for the fourth quarter and 7% to $83.5 million for the year 2006. This compares with $18.9 million for the fourth quarter 2005 and $77.9 million for the year 2005. This increase was primarily due to the consolidation of an entity which we previously treated as an equity investment as well as rent increases and rent from new tenants.

Income from continuing operations in the real estate segment was $6.6 million for the fourth quarter and $33.7 million for the year 2006. This compares with $2.5 million and $22.6 million for the respective periods in 2005. Gains on the sale and exchange of investments of approximately $6.4 million and lower impairment charges of approximately $4.6 million accounted for the majority of this increase.

The Company recorded a loss from discontinued operations related to its real estate segment of $1.3 million for the year 2006. This compares with a gain of $1.4 million for the year 2005. The Company recorded impairment charges of $1.1 million for the current quarter and $4.5 million for the year 2006. This compares with $5.9 million in the fourth quarter of 2005 and $21.8 million for the year 2005. Of the $4.5 million in 2006, approximately $3.2 million pertain to one property, which has been sold.

On a companywide basis, net income for the current quarter was $43.6 million, and $86.3 million for 2006. This compares with net income of $11.5 million for the fourth quarter 2005 and $48.6 million for 2005.

On the fully diluted per share basis, net income for the quarter was $1.12 per share and for the year was $2.22 per share. Funds from operations for the quarter were $54.9 million or $1.39 per share and $128.5 million or $3.29 per share for the year. This compares with $24.2 million or $0.63 a share for the prior year quarter and $98.6 million or $2.53 per share for the prior year. Cash flow from operations generated $119.9 million for the year ended 2006 or $3.07 per share. This compares with $52.7 million or $1.35 per share in the prior year.

Our 2006 results were obviously strongly affected by the successful merger of two of our managed funds, CPA-12 and 14. Let me take a minute to discuss the financial impact of this merger. Total merger-related revenues were approximately $46 million. Merger-related expenses, including provision for taxes, totaled approximately $21.8 million. The gain we recorded on the sale in the exchange of CPA-12 was approximately $6.5 million, and we received approximately $6.8 million in special distributions from the merger.

We utilized the proceeds from the merger to purchase property with a value of approximately $126 million including the assumption of debt of $58.7 million. While this purchase is expected to reduce future asset management revenues by approximately $1.3 million, they are expected to generate approximately $4.9 million of additional rental income and approximately $3.9 million of cash flow in the Company's real estate segment.

While the merger positively affected the Company's 2006 results, overall 2006 was a very strong year in all aspects. On a normalized basis -- normalized defined as including deferred amounts as they relate to achieving the CPA-16 hurdle and excluding the results of the merger -- net income for the year 2006 was approximately $70 million. This compares with normalized net income of approximately $55 million for 2005.

As Gordon mentioned, the Company continues to have a very strong balance sheet. At December 31, 2006, recourse debt was $2 million and represents less than 1% of the total assets of the Company. Limited recourse debt represents less than 26% of the total assets of the Company and of this debt, approximately 73% is fixed with the weighted average's interest rate of 6.53%.

With that, I would like to turn the discussion over to Thomas Zacharias, our Chief Operating Officer.

Thank you, Mark. I have a few comments I would like to make about our portfolios for the year end 2006. As Mark mentioned, we have two major lines of business, the real estate portfolio [owned] of 18 million square feet, [three] CPA REITs that we manage of approximately 79 million square feet; value there approximately $7 billion. Our assets under management in the CPA REITs increased by $532 million over the 12 month period year end 2005 to 2006, which is an 8.2% increase.

The asset sales related to the CPA-12 liquidity event mitigated growth in assets under management in 2006. Nevertheless, the six year annual compound growth rate for CPA REIT assets under management to the end of 2006 was still approximately 26%. December of 2006, the merger of CPA-12 into 14 was completed. In this liquidity event for the CPA 12 portfolio, approximately $537 million of assets went to CPA-14 and as Mark mentioned, $126 million assets went to the LLC. In the assets acquired by the LLC, we had a partial interest in 37 properties in six states and France for a total of approximately 1.7 million square feet.

Gordon mentioned the fourth quarter (indiscernible) storage initiative. At year end, the portfolio consisted of fixed properties [owning] approximately 375,000 square feet at a cost of approximately $25 million. In 2006, we completed the sale of five assets from the LLC portfolio for a total of $32 million in net gain, GAAP gain of $3.4 million. We were able to reinvest the proceeds from three of these sales through 1031 exchanges which postponed capital gains taxes for our investors.

2006, we completed $30 million of refinancing on a consolidated basis in the LLC; another $6 million of refinancing has been completed year-to-date 2007. There are additional refinancing opportunities with the underleveraged LLC portfolio that we are currently pursuing. The LLC portfolio occupancy is now approximately 96%. The portfolio is in excellent shape. We have sold smaller and weak assets over the last four years. Assets on a square footage basis increased by over 10% in 2006 as a result of acquisitions from CPA-12 and one other investment that we made along with CPA-16.

The year end, the occupancy rate for the entire W.P. Carey group's 97 million square foot portfolio was approximately 99%. We own $107 million worth of CPA- 12, 14, 15 and 16 REIT shares. We expect to receive another 31 million plus in REIT shares for our services in 2007. In 2007, the Company plans to invest available cash flow in self storage assets and in the renovation of a hotel that is owned for a long time in Livonia, Michigan. We also plan to do some strategic asset sales for the CPA REITs to maximize returns for our REIT investors. 2006, from the nearly $400 million of REIT asset sales; the net GAAP gain was approximately $100 million.

In summary, the LLC portfolio -- the CPA REIT portfolios are performing well and we've remained focused on keeping our eye on the ball and creating value for our investors.

I would now like to turn the call over to Mr. William Polk Carey, the Founder and Chairman of the Company.

Thank you very much, Tom. As you mentioned and all of us know from the release, 2006 was a fantastic year and it was based primarily on good performance for our investors. The returns which we realized as a manager, we would not have realized if it hadn't been for superior performance. But it's been pretty consistent over the years. I don't have any accurate comparisons of us against everybody else in the business, but most everybody tells us that there's nothing quite as good as what we've been able to do for our investors and I'm inclined to want to believe that. So thank you so much and now --

At this time we would like to open up the line for some questions.

(OPERATOR INSTRUCTIONS). Mike Beall, Davenport & Company.

A couple of questions and then I'll get back in line if there is one, but our assets grew I think you indicated 8.2% and granted, those numbers were held back by the liquidation of CPA-12 and to some extent by asset sales, but that's well below what you saw in terms of growth at companies like Cohen and Steers and Brookfield, which don't do exactly the same thing, but are certainly benefiting from the same trends. Theirs were up more like 50%. You say funding is not a problem. I guess the question is, is the assets, the type of assets that we invest in or the markets we look to, are we so narrow that we're not getting our share of what's sort of going on? The self storage assets you mentioned we'd bought some of those, was that for our own account as sort of an R&D effort? Is that something we hope to do more with? So I guess the question is, it doesn't seem like we're quite getting our share of what's going on in the world. Just how would you respond that?

It's a very good observation and I'll just hold Cohen and Steers aside for a moment because they invest so much in public securities and that business is more scalable than investing directly in assets the way we do. But let me take it in two parts.

One, on the self storage, that is an initiative that we hope to turn into our managed services business and we can't really discuss it beyond that right now, but that is an area that we hope to grow. We've taken two of our top people, one of our very top deal people, a woman by the name of Anne Coolidge, is spearheading this and we've dedicated some very strong investment talent to that business, so we've committed to growing that business and under Anne's leadership and she's really terrific.

So, the self storage is one area we hope to grow, and generally, I would say your observation that Brookfield grew faster is clearly right. I would say that we have -- we've been in a competitive environment in the sale leaseback business. I think it's stabilized. We would hope to grow more than that, and we are held back somewhat by dispositions, but our plan is to grow as quickly as we can prudently grow, and that takes the focus from our investment people to find more assets and find more areas to grow. But we would like to have seen it grow a little faster too, but it's not a bad number.

I guess just along those lines, we raised money in our CPA REITs and basically at a book value and out there in the world, at least some of the REITs we're competing with can sell their stock at a multiple of book value or a premium, and I guess does that argue -- do you ever think about making our REITs more of a public vehicle as opposed -- I mean, traded versus nontraded? I guess as importantly, are we at a disadvantage from a capital cost standpoint relative to some of these people that are accessing the public markets at a premium valuation it would appear to what we're raising money at.

I would say that the cost of capital is actually one of my favorite subjects. There are various components to the cost of capital and one of them is at what price you can sell the shares and the cost of selling those shares, and I think your analysis on the book value is correct. I think somebody like Berenato today for instance, has on that measure a lower cost of capital.

But the other way to look at cost of capital and the way we look at it is what is the investor expectation for return? And the investor base that we have, which are generally either people that are retiring or near retiring, they're looking for a steady income and they generally don't have a very high cost of capital in terms of the return that we've provided to them or the return that they're looking for. So the cost of raising the capital is higher, but that's only one component of the cost of capital.

The other way to look at it is what is somebody's desired return on that capital and then how much -- and then you add to that how much it costs to raise it. But I don't think we're terribly disadvantaged with our cost of capital today. But we are always interested in looking at other cost of capital, but I don't think we're terribly disadvantaged today.

The cost of capital really applies to the managed REITs rather than to the company itself. The company itself isn't raising capital and doesn't need any capital. The managed REITs have substantially outperformed investor expectations and they've been getting total returns which are significantly higher than they were looking for, so they don't feel disadvantaged by the cost of capital either.

The numbers I've seen, most REITs are trading at, what is it, 1.05, 1.09 of book or NAV, I guess I should say.

The numbers we see are a little higher, but that's okay. Just one other thing. I was glad to see that and look forward to reading the prospectus for the newly issued, I guess CPA-17, but is there -- and apparently that we can take steps there to be tax efficient for everybody involved in terms of incentive fees. We're still paying over $1 a share this year in taxes are accrued that. Is there anything that we can do about -- in the past I guess or is there anything we can do to mitigate this tax liability on the assets that we're already managing? Or we've sort of given up on that?

Well, Mark do you want to -- I don't think so. The short answer is we've been working on it, but we haven't found anything.

I wouldn't say we've given up on it, but it's very difficult. These funds are fairly low in trend so it's very difficult to do anything with their structure that would change our tax model today, but we do continue to look at that and we still have options that we are actively reviewing.

The CPA-17 is a vastly improved model from a tax standpoint and conceivably, we can follow that model going forward in a very efficient fashion; all of our investors.

Wish we could have thought about it when we did CPA-12, but that was 11 years ago. One last thing and I won't even bother to get back in the line. Our income stream is lumpy. We've always used those words and it will always be that way. You've talked about sort of normalized a little bit, but clearly we have windfalls like this year or bulges two years ago. You wouldn't want to include that in your dividend. Do you ever think about that -- those sort of gains to the extent that we get paid in cash more in the way of share buybacks as a way to sort of pay that to capital back to shareholders or extra dividends or --?

That's something we do -- we talk quite a bit about. What we've done is we've taken those gains, if you will, and reinvested them in real estate, and Mark kind of walked through what we hope the sort of future net benefit from a cash flow standpoint is. So hopefully that will show up -- if we do that well, hopefully that will show up in the dividend over time, but a special dividend is not something that, at least at the moment, we think you get a lot of credit for in the market place, so --

I would agree with that and then I guess how do you all feel about share repurchases?

Well, we've used share repurchase in the past, and we continually have an open mind about it, but we don't have a share repurchase plan in place at this time.

Yes, our most current program expired in December. We have currently been in a blackout period, not able to put into one, but it is something we discuss frequently with the Board as well, so it's something we constantly look at.

Can you talk about the mix of how we receive our fees in cash versus shares of the underlying CPA REITs? I know we like to align the interest whenever we can and every chance we can, but is that mix likely to stay the same? We end up with a large holding in these assets, I'm not sure the market totally appreciates that growing value, but again, what sort of mix are we looking at in the future versus the past?

That's an annual determination we make and we look at the performance of the funds as well as what we feel the value of those funds will be when we make that determination. I will tell you that in the CPA-12 merger, we had approximately over 2 million shares of CPA-12. We took about half of that in cash off the table and we rolled about half of that into CPA-14 shares as well, so we do take a look at what our exposure is to the funds. But it's an annual determination that we make and we feel that it's been a -- these funds have performed well, as evidenced by the $6.5 million in gains that we recognized on this past merger and that is both a good investment and that aligns our interest [level].

Certainly we have to be willing to eat around cooking and that's good, but the goals of a publicly traded company like ours versus maybe the investors and the CPA REITs probably aren't exactly the same. But, okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears we have no further questions.

Before we sign off, we'd like to inform you that the 2006 schedule K-1s are now available online. Please visit www.k1support.com/carey. These K-1s ones are also scheduled to be mailed February 28. Additionally, a replay of this call will be available after 2 PM. Call 877-660- 6853,account number 286, conference ID 229243. This replay will be available through March 2. Thank you for joining us today and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.